The Dave Ramsey Dilemma
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Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
10yChad Tate there are plenty of threads on this topic of you do a search. The bottom line is everyone needs to find their balance of risk tolerance and need for fast returns. Debt is not uniformly evil but for the audience Dave reaches no debt is probably the right message. If you are an alcoholic zero alcohol is a good policy. But if you can drink responsibly social drinking is fine and even beneficial. Same with debt. If you are smart and Use Debt wisely and carefully it can be a good tool to grow wealth. If you leverage every last penny with no reserves a bad cycle will bankrupt you. You need to find your own balance rather than blindly follow any books or even this site. Good luck
81 Replies
- Fort Worth, TX · Member since 2016 · 19 posts · 18 votes10y
So what Dave Ramsey teaches is smart, but you cannot live debt free. I explain this in that blog post below. If you have any questions after reading the blog below, PM me or post a commit. Hope this helps.
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes10yChad Tate there are plenty of threads on this topic of you do a search. The bottom line is everyone needs to find their balance of risk tolerance and need for fast returns. Debt is not uniformly evil but for the audience Dave reaches no debt is probably the right message. If you are an alcoholic zero alcohol is a good policy. But if you can drink responsibly social drinking is fine and even beneficial. Same with debt. If you are smart and Use Debt wisely and carefully it can be a good tool to grow wealth. If you leverage every last penny with no reserves a bad cycle will bankrupt you. You need to find your own balance rather than blindly follow any books or even this site. Good luck
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes10y
Originally posted by @Chad Tate:
He went from millions to bankrupt with REI so it's hard to disregard his experience and concerns.
Any help with thinking this through is greatly appreciated!
Don't take REI advice from someone that "went from millions to bankrupt with REI".
- Real Estate Agent · Pittsburgh, PA · Member since 2015 · 1k+ posts · 846 votes10y
Originally posted by @Chad Tate:
As a newbie with limited capital from which to begin investing, and a Dave Ramsey fan, I'm struggling with how to justify REI knowing he teaches to do everything with cash, including REI. In fact, it would seem that any strategy I'd have to consider to get started would be 180 degrees from what he teaches (I'm liking BRRRR). He went from millions to bankrupt with REI so it's hard to disregard his experience and concerns.
Any help with thinking this through is greatly appreciated!
Hey Chad,
I like Dave Ramsey as well, but I think when he talks about cash everything he is a little off base. My opinion is that Ramsey is good for getting out of BAD debt (credit cards, car loans, student loans, etc.) the stuff that doesn't make you money. Listen to some of Robert Kiyosaki. Taking out a loan to buy an investment property is not a bad move at all. You are using someone else's money to get rich! With interest rates so low you are using someone else nearly free money to get rich!
I've always been of the opinion that Ramsey is good to get out of bad debt, but then you need to follow different opinions to go from good to great financially. All depends on your own goals and what you define as good or great though. If you really have an aversion to debt and having a loan hanging over your head then the extra stress just isn't worth it. Just set some criteria for yourself and what you want out of life and go for it!
Also, the only real way to go bankrupt with buy and hold cash flow rental property is if you continuously buy bad deals or if people stop renting. If the value of homes go down rents may decrease, but if you buy right you can ride out the storm.
- Grapevine, TX · Member since 2016 · 19 posts · 8 votes10y
@Trevor B., thank you for your reply and link to your blog. Excellent article and very informative. Definitely has me thinking. Thanks again!
@Account Closed. You too, have gotten me thinking, so thank you for your reply. The more I read, the more I'm understanding that Dave Ramsey is great at helping people get out of bad debt, and teaching how to manage money to those who have never known any better. However, on the investment side of things, I just can't help but think there are better ways for responsible money managers to invest and build wealth faster through REI.
Again, thank you all for your replies. If I may, one last question:
I'd feel much more comfortable with a larger savings/cushion before jumping in (wouldn't everyone!), so for a newbie, would you recommend a buy and hold property with $300-$400 cash flow (if bought at the right price and all due diligence showing it's a good investment), or flipping that same property for fast cash to help build a better reserve? My long term goal is to have many buy and hold properties through BRRR, but the conservative part of me would like to have better reserves before doing so.
Chad
- 10yJesse StephensonPro MemberProperty Manager · Chapin, SC · Member since 2014 · 71 posts · 43 votes
There are investors on BP who only buy rentals for like 25-30k and do save up and pay cash for them. So it can be done. If you are debt free and have a good income saving 25k can be done in a year or two
- Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes10y
Originally posted by @Jesse Stephenson:
There are investors on BP who only buy rentals for like 25-30k and do save up and pay cash for them. So it can be done. If you are debt free and have a good income saving 25k can be done in a year or two
- And in just 10 years you'll have 5 to 10 houses worth at best $300,000. Or, $290,000 or $250,000.. Wonder what these properties were selling for 20 years ago and how it worked out for those owners.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes10y
Dave Ramsey gives good advice to people struggling with debt. Mastering personal finance is the first step to financial freedom. However once you know how to master debt, you should be using debt to your advantage. There is a reason why the vast majority of millionaires in this country largely became millionaires by buying real estate and using debt to finance it.
District Invest Group545 Reviews - Investor/Realtor · Hoover, AL · Member since 2010 · 1k+ posts · 459 votes10y
I'm a DR fan, but differ on RE. As long as you don't over leverage, it's ok to use debt to build wealth. BALANCE!
- Cincinnati, OH · Member since 2016 · 23 posts · 13 votes10y
I understand your concern, I was thinking the same thing when I first heard about all this investing and the credits you need. The thing with Dave Ramsey is he is educating the consumers; not the investors or business owners. Both sides have a different set of rules. When he is talking "debt" he is talking about people who make bad purchases on things they can't afford. There is good debt and there is bad debt. Good debt makes you more money, bad debt takes money from you. When he talks about using cash for everything, again he's talking to the consumers. He may say he doesn't have a debit card for his personal use, but you bet his business uses credit because you can't run a business without credit. Just a different set of rules. Dave Ramsey is actually all for real estate investing so if you do it right, I don't think he would be against you!
- Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes10y
@Chad Tate flipping is the better option for a number of reason. It gives you significant cash in hand.
I flip and buy and hold. I only do the latter with excess cash.
- Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes10yChad Tate I'd encourage you to think about the ecosystem of money and how it works as you're thinking about the use of debt. When you borrow capital from a bank, you're basically saying: "I think I can get a higher rate of return from this money than the interest rate I'm paying the bank." The bank, similarly, is saying: "I think I can get a higher rate of return by loaning this money to Chad than I'm paying Grandma who deposited it in their checking account." In a perfect frictionless world, Grandma, the Bank, and Chad are all getting the same *risk adjusted* rate of return on their money. The trick in the REI game is exploiting your knowledge, skills, or labor to find ways for your risk adjusted rate of return to be higher than the Bank's. The risk-adjusted spread there is your profit. There's nothing wrong with taking no debt on - I've got no issues with people who want to goat route. But, the generation of wealth happens when you either increase that risk-adjusted spread OR you scale up to larger dollar amounts to make use of whatever spread you've got. This whole process (the field of Finance) is common and well understood in every large corporation, government, or even moderately sized entity. Those organizations hire specialists to make risk-informed decisions. There's nothing illogical or scary about it and the fact that someone doesn't understand it isn't a reason to speak against it (talking about the public at large - not anyone in particular). I think it boils down to this: Anyone can follow instructions. To be a professional, though, you have to understand *why* those instructions make sense. And, AFAIC, those instructions say: "Use debt."
- Rental Property Investor · Douglas County, MO · Member since 2014 · 1k+ posts · 1k+ votes10y
If you have personal debt, use DR's advice and get rid of it. But don't think that's the most important lesson he has to teach. The single most important lesson DR teaches is budgeting. Get control of your money and learn how to manage it. This skill will serve you well whether you follow the rest of Dave's advice or not.
Be sure that you have the cash reserves necessary to protect you from the unexpected. When you have 3 or 4 vacancies at once and one or more need extensive repairs before they can be rented, you are not only out the rental income, but the mortgages must still be paid.
I am completely debt-free, and have done all of my investing debt-free. I am not against leverage, it just doesn't fit with my current investment plan.
In the end, each of us must choose our own path. Each of us decides if and when to use debt, and at what level. No matter how much advice is given and received, that doesn't change.
- Entrepreneur & Real Estate Investor · ID · Member since 2016 · 82 posts · 84 votes10y
If you can't handle your money and have no self-control. Dave Ramsey might be able to help you. But he'll never help anyone build any real wealth with his ideas on ignoring credit and leverage.
Warm fuzzies won't generate wealth. - Investor · Weston, WI · Member since 2016 · 105 posts · 114 votes10y
@Chad Tate, I also am a big Dave Ramsey fan, however I think that the power of leveraging is too big to dismiss out of hand. He says on a daily basis that what people fail to do while considering the cost of debt is to "factor in risk." He is right, however he takes the exact opposite approach and gives risk an infinite value which also is not realistic.
I have personally decided that I will be debt free and live in a paid for house, though will leverage my investment properties. The way I see it is that I would not have been able to purchase my investment properties without the leverage, so if they are foreclosed on or lost, I am not in a worse position than if I had not purchased them in the first place.
Good luck
- 10yJohn CasmonPro MemberCincinnati, OH · Member since 2013 · 1k+ posts · 1k+ votes
@Chad Tate The beauty in real estate is there are so many ways to invest to fit your skills and goals. If you are adamant about not using debt, why don't you partner with those that have funds? Or become an agent or wholesaler?
As far as DR, I laughed out loud at @Account Closed comment, but he's dead on. I wouldn't take medical advice from a med school dropout (no matter how successful he became in another field). Probably want to find successful RE investors and get advice from them.
Another way to think about it is to separate your personal finances from your RE business. The business needs loans and working capital to thrive, but your personal finances do not. I can tell you that there aren't very many successful companies that are debt-free. And the ones that are miss an opportunity to expand and grow by not taking advantage of leverage. - Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes10y
Which do you value most, growth or safety? The more leverage, the higher the potential returns and the faster you can grow your portfolio, but that comes with added risk and volatility. This additional risk and volatility can be mitigated, hedged, and/or completely avoided by a skilled REI operator, but if you are not there yet then it is a decision of growth vs. safety in my mind. It is not black or white either, to use debt or not, but many shades of grey in how much leverage to take on. In addition to how much, you can also choose when in the investment lifecycle to apply leverage. For example, I like to buy all cash if possible, which eliminates competition from retail buyers and thus gets me a better deal and the lowest leverage when risk is still high. Then I renovate, which eliminates the unknowns on condition of the property and adds a nice forced appreciation equity bump (if done right). Then I rent it for a bit, which lowers risk further (if done right) by validating my income and expense projections. Then and only then when I've reduced the risk profile do I cash out refinance to leverage back up my risks and returns. What I have just described is BRRRR, but rarely have I heard it described in this way to use leverage as a tool to manage the risk/return profile throughout the life cycle of the investment.
To my mind, financial leverage is not inherently your friend or enemy, it just multiplies everything without prejudice ... if it is a gain, that gain gets multiplied ... if it is a loss, that loss gets multiplied. It is a tool like a hammer is a tool, you could use it to build a house or whack yourself in the thumb, and if you whack yourself in the thumb it doesn't mean that hammers are evil.
- Investor · Riverside, CA · Member since 2011 · 2k+ posts · 3k+ votes10y
Dave Ramsey is the messiah of the financially inept. I've read his book, Total Money Makeover, more out of curiosity than anything else. What he teaches is good stuff; if you're a complete financial imbecile who applies for credit cards at the register just to get the extra 10% off and then continues to shop long after the money runs out.
Pay cash for real estate? Unless you're getting a huge discount, that makes very little financial sense. The beauty of real estate is leverage. The difference between an investor who uses leverage as a tool and a Dave Ramsey listener is that the DR follower uses leverage to liquidate other debt. They fall for the "refinance your house and pay off your credit card and student loan debt!" scam.
I do think the world needs a guy like Dave because we all learned nothing about handling money in school and so many end up with burdening credit card debt. However, paying off low interest real estate debt or paying cash for properties is not the fast track to wealth. You'll need a pretty high income and if I were 'just getting by' I wouldn't even waste my time with real estate if I had to pay cash for it. The return on your equity in a free & clear house is somewhere around 5-6%. You'd be better off doing small short term loans to mobile home dwellers who cash their pay check at the local check into cash and then buy their groceries, cigarettes and scratch tickets at the convenience store.
- San Antonio, TX · Member since 2016 · 48 posts · 36 votes10y
I love Dave Ramsey and these replies have really impressed me with their depth of understanding. Having your fridge and washing machine on a 22% credit card is bad. Having a 30-year fixed loan at 3.25% on a property generating substantial positive cash flow is good.
Which type of person is Dave trying to reach? I doubt he would tell successful real estate investors to stop utilizing debt, and they shouldn't tell someone with car payments of 40% of their monthly income to go take out a loan.
- Peterborough , Ontario · Member since 2015 · 111 posts · 15 votes10y
Great info guys. This was very informative for myself, and I believe it can help many other people. I have done all the RK books... I think it is time to do DR now. Best of both worlds.
- Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes10y
Originally posted by @Sylvia B.:
If you have personal debt, use DR's advice and get rid of it. But don't think that's the most important lesson he has to teach. The single most important lesson DR teaches is budgeting. Get control of your money and learn how to manage it. This skill will serve you well whether you follow the rest of Dave's advice or not.
Be sure that you have the cash reserves necessary to protect you from the unexpected. When you have 3 or 4 vacancies at once and one or more need extensive repairs before they can be rented, you are not only out the rental income, but the mortgages must still be paid.
I am completely debt-free, and have done all of my investing debt-free. I am not against leverage, it just doesn't fit with my current investment plan.
In the end, each of us must choose our own path. Each of us decides if and when to use debt, and at what level. No matter how much advice is given and received, that doesn't change.
Bugeting takes up a lot of time. Time that can be used acquiring deals and having memorable life experiences.
People that say "that latte at starbucks won't make you happy", Bull****!! Coffee and the experience at starbucks WILL and DOES make people happy and more productive, there are demonstrable physiologic and psychologic reasons for this.
- Rental Property Investor · Douglas County, MO · Member since 2014 · 1k+ posts · 1k+ votes10y
Originally posted by @Andrey Y.:
Originally posted by @Sylvia B.:
If you have personal debt, use DR's advice and get rid of it. But don't think that's the most important lesson he has to teach. The single most important lesson DR teaches is budgeting. Get control of your money and learn how to manage it. This skill will serve you well whether you follow the rest of Dave's advice or not.
Be sure that you have the cash reserves necessary to protect you from the unexpected. When you have 3 or 4 vacancies at once and one or more need extensive repairs before they can be rented, you are not only out the rental income, but the mortgages must still be paid.
I am completely debt-free, and have done all of my investing debt-free. I am not against leverage, it just doesn't fit with my current investment plan.
In the end, each of us must choose our own path. Each of us decides if and when to use debt, and at what level. No matter how much advice is given and received, that doesn't change.
Bugeting takes up a lot of time. Time that can be used acquiring deals and having memorable life experiences.
People that say "that latte at starbucks won't make you happy", Bull****!! Coffee and the experience at starbucks WILL and DOES make people happy and more productive, there are demonstrable physiologic and psychologic reasons for this.
Oh, dear me! If I spend time developing a budget I might not have time to stop at Starbucks. Boohoo!
Budgeting is money management. If you want to be successful in business, learn how to do it. Either you control your money, or someone else will.
And FYI, "latte expense" can be built into any budget.
- Investor/Realtor · Wentzville, MO · Member since 2014 · 846 posts · 431 votes10y
The best way to pay off debt and increase your income streams is FOCUS on MONEY MAKING ACTIVITIES.
If you are distracted by constantly thinking about eliminating bad debt, your income will most likely stay the same. This will hamper your debt pay down strategy and cause you to put opportunities to increase income on the back burner.
If you grow your income streams first by buying income producing assets, your net worth will increase, you will have more income to throw at your bad debt, and you will be focusing on the 20% that produces 80% of your results.
- Investor · Gaithersburg, MD · Member since 2013 · 660 posts · 441 votes10y
There are lots of famous financial people out there. Some tell you to do whatever it takes to buy real estate, others say only pay cash. Some offer a mix. I will say that you should never discount anyone's advice per say. Listen to what they all have to say (Robert Kiyosaki, Suze Orman, Dave Ramsey, etc etc). All their advice differs and keep in mind, they are trying to provide advice that applies to MOST people. They aren't speaking directly to you, nor do they know your situation.
So take it all in and formulate a plan that fits you. They all have good advice in parts and you have to figure out what applies to you and go from there. I can tell you right now, if I followed Dave Ramsey's advice and only bought with cash, I'd have 1 unit (maybe 2) instead of 20 with less than half the cash flow. Just keep in mind, they are all "experienced" (and Rich), and they do have lessons to teach, just figure out which lessons apply to you and what you want to accomplish and know most of the time, there is no right or wrong way, just your way.
- 10yAaron HowellBusiness MemberReal Estate Agent · Crozet, VA · Member since 2014 · 436 posts · 223 votes
Dave Ramsey advice and Real Estate investing are pretty much polar opposites. Ramsey is good for people making $30-40K/year but we're all using real estate to outsource our debt.
I think his advice is sound but it has very little to do what I'm doing.
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